Is this as good as it gets for the economy?

Richard Yetsenga

ANZ chief economist

Sentiment towards the global economy is as positive as at any time since 2011.

European unemployment has been falling since 2013. Bank lending in the four major advanced economies has been rising since 2015. Asian exports and commodity prices have been recovering since early 2016. And China was always going to handle its current tightening cycle in reasonable shape.

However, these positives are now baked in so the prospect of another sizeable upside surprise seems very low.

Ephemeral factors have been at play in this recovery, particularly the outcome of the French Presidential election in May 2017.

“[Global economic] positives are now baked in so the prospect of another sizeable upside surprise seems very low.”

Following the combination of Europe’s sovereign crisis, the Asian trade recession and 2016’s sequence of disasters for the political pollsters, everyone feared the worst. On everything.

Europe’s recovery couldn’t last. US President Donald Trump was going to destroy global trade. France’s Marie Le Pen was likely to try and pull France out of the Eurozone.

Yet much like politics in 2016, all of these expectations proved to be off base - and for a change, missing expectations was good.

While post-Trump catastrophising about the global trading regime was almost certainly overplayed, the current portents on both US-China trade and NAFTA are poor; potentially very poor.

As well, the last six months have seen a long list of countries present either a radical shift in policy direction or a sharp shift towards a less stable government (even within the boundaries of a stable institutional backdrop).

The US, UK, Australia and New Zealand all feature on this list; as well as the much more unstable situations in Iran, Spain, Saudi Arabia.

A range of economic, technological and social reasons are conspiring to unsettle electorates. A modest global recovery is unlikely to tip the balance back towards stability, in fact the evidence suggests the instability is becoming chronic.

Missing also from this global recovery is an integral component: credit. In high-debt economies such as China and Australia, regulators are working hard (and appropriately) to ensure credit growth does not surge the way it might have in previous recoveries.

In Asia’s two other large economies, India and Indonesia, banks are still working through a backlog of bad loans from previous exuberant lending. And in the four major advanced economies bank lending is growing at less than 5 per cent a year; far shy of the 10 per cent plus rates seen before the crisis.

Historically, a pickup in credit growth has been a crucial element for an initial economic recovery to transition into a boom. It’s missing this cycle.

There is good news. Many economies are likely to report some stronger wage growth this year and even a bit of a rise in inflation. But even so, the pickup is likely to remain well short of rates of growth that many consider normal.

In Australia any pickup at all will be welcomed. Technology is a turning out to be a more epochal shock than China’s rise; wages are the canary. While slow wage growth suggests consumer demand will remain sub-par, household savings are a larger problem. Consumers are nearly tapped out.

Household savings in virtually all economies have fallen to levels we haven’t seen since pre-crisis or even ever.

For the US, Australia and New Zealand the household saving ratio is at levels not seen for a decade. For the EU it’s at least 20 years. The UK hasn’t seen household saving at these levels since the 1970s.

Sensitive

While households have outspent slow-growing incomes by saving less, that now makes them much more sensitive to asset markets. And asset prices in 2018 will not repeat 2017.

Last year asset prices benefitted from a triple treat of positive surprises – better politics and trade, lower inflation and interest rates, and stronger growth. There is almost no prospect of an encore performance.

In fact given the tightening in global liquidity will only become meaningful this year, last year’s false starts on calling a decent asset market correction, are likely to be vindicated this year.

Let’s welcome the global recovery and take advantage of it. But the chances of further improvement are low. More likely is a growing recognition that this is about as good as it gets.

This will put structural policy challenges around issues such as the state of government budgets, housing affordability and the most appropriate role for monetary policy back firmly back into the spotlight.

Richard Yetsenga is chief economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.